Kidman sale and the Federal Budget

2/05/2016

If ‘selling the farm’ to foreigners is something that Treasurer Scott Morrison’s wants curtailed, then it would be better if he acted in a systematic way through the federal budget rather than an ad-hoc and populist way by banning the sale of individual assets like the Kidman properties.

The reason that Australia sells a lot of assets to foreigners is no mystery. The nation spends a lot more than it earns; which is to say that we have a substantial current account deficit. Everyone knows that if you spend more than you earn, then something has to be sold to make up the difference. That simple accounting is as binding on countries as it is on households.

Australia’s current account deficit in the last quarter of 2015 was $22 billion, which was an increase of $9 billion from the same quarter in 2014, largely due to tumbling commodity prices. This deficit is financed by the net purchase of Australian assets by foreigners.

Some of that investment goes into financial assets, such shares and bonds issued by Australian firms and governments. Other investment goes into creating new assets, such as LNG export facilities. The final component is the one that causes political angst – investment by foreigners in existing real assets, such as houses, farms, electricity networks and ports.

But regardless of the type of assets, the reason that Australia is a net seller of assets and China is a net buyer is that we spend more than we earn and they don’t. Both the household sector and the government sector in Australia live beyond their means. Household debt in Australia continues to rise as a fraction of GDP (in contrast to the US, UK and Germany) and Government debt is rising even faster.

If the Treasurer does not like the net sale of assets to foreigners then he should take the same red pen that he used on the Kidman sale and apply it to line after line of middle class welfare spending in the Federal budget. In addition, he should adjust the tax system to encourage rather than deter saving by households.

Putting aside the disjunction between large budget deficits and bans on foreign asset sales, there are other things to dislike about the decision. First, it is such an arbitrary use of executive power. The owners of private property have been banned from selling it to the highest bidder. The Kidman properties are leases rather than freehold property, but nonetheless as developed assets they are private property just as the leases over airports or toll roads are.

When banning foreign investment proposals treasurers never give a full explanation of their decision, but it is often clear what the reasoning is. That was the case when the sale of the ASX to the Singapore Stock Exchange was blocked in 2011 and the sale of Woodside to Shell was blocked in 2001.

The reason that the Kidman sale was blocked is not at all clear. The only explanation given by the Treasurer for the ban is that the holding is too large, which raises the second problem. The Federal Government sees the agricultural development of Northern Australia as a great opportunity for the nation. Moreover, it recognizes that foreign capital with an appetite for high risk will be needed in large amounts.

But now the Treasurer is saying that despite the fact that the scale of agricultural enterprises is growing rapidly and despite the dependence on foreign capital to develop Northern Australia, foreign investments in individual Australian agricultural assets should not be large.

Finally, the Treasurer’s decision is a small step away from Australia’s commitment to openness to the world. Recent Federal Governments can be proud of their record in keeping Australia’s economy open, which is so fundamental to the long term health of the nation. Immigration has been maintained at relatively high levels. Significant free trade deals have been signed with China, Korea and Japan, and similarly large deals with our transpacific partners and India are in train. But the Kidman decision is a step in the opposite direction. It is a step away from the free flow of capital.